Southern Water: Firm asks regulator Ofwat to hike customers' bills by 84% as its debt costs spiral
Southern Water’s debt costs are spiralling and has been downgraded again by the global credit ratings agencies.
Last week, S&P lowered its rating on Southern Water Services Ltd – one of the company’s key financing vehicles – to BBB-, meaning it is teetering just one level above junk status. It came a day after Southern Water Services agreed a steep premium to borrow £300m from so-called distressed credit funds.
The bond issue came with an interest rate of 7.75pc – significantly higher than the cost of borrowing that Ofwat has modelled for the industry over the five-year investment period beginning in 2025. Debt market experts warn that any company whose debt is above the level that the regulator allows will have to absorb the extra costs, squeezing profits and making those companies less likely to attract investment.
Southern has said it is looking to borrow up to £4bn over the next five years. The water firm is among the worst-performing water suppliers in the UK. They were one of only three – along with Anglian Water and Welsh Water – rated as “lagging behind” in Ofwat’s latest audit of the sector.
The company deals with waste water across the city and surrounding area while Portsmouth Water supplies drinking water.
The water firm has secured £300 million of additional debt financing following the completion of a bond issuance. Stuart Ledger, Chief Financial Officer of Southern Water said: “The success of this bond issuance at a time when investors are looking closely at the wider sector and regulatory landscape is a strong endorsement of the work our teams are progressing to improve our operations for the benefit of customers and the environment."
However, Southern has still come under pressure in debt markets due to concerns over its credit rating and the potential for debt covenant breaches. Southern, which supplies 4.7 million customers in the south-east of England, has also asked water regulator Ofwat to allow it to increase the average annual household water bill to £734 by the end of the next regulatory period, higher than any other water company in the UK.
Southern Water said in a statement that it continued to maintain three investment-grade credit ratings from Standard & Poor’s, Moody’s and Fitch. The company said: “Our recent bond issue was oversubscribed and we continue to maintain strong liquidity.
“As part of our 2025-30 business plan, we anticipate our funding will be strengthened further with additional equity from our shareholders following clarity from Ofwat.” In a previous statement Southern described S&P’s ratings action last week as “disappointing”.
Ofwat said: “We will continue to engage with the company and closely monitor its progress as it delivers its turnaround plan to improve performance and financial resilience. We will publish our Final Determinations for all companies on 19 December.”